Post divorce tax consequences

Avoid Post-Divorce Tax Consequences

Chances are, your life plan did not include filing for divorce. When you said, “I do”, you believed wholeheartedly it was a promise you’d honor as long as you and your spouse were alive. Unfortunately, life happens, and people change. Some couples can weather the storms and evolve together. Others are not. What’s important now is to protect yourself and ensure your share of what you built together is kept as intact as possible. All while avoiding post-divorce tax consequences.

Whether your divorce is amicable, or contentious, you need to get all agreements and disclosures in writing. This is needed to protect yourself, and ensure you receive an equitable distribution of marital property. A Statement of Net Worth and determining your tax filing status until the divorce is final need to occur as soon as possible after the initial divorce filing.

Engaging your accountant to help you navigate the financial details will help you avoid confusion. Your accountant can help mitigate potential conflict over past and future tax liability, refunds, and personal versus marital property.

Ensure Property Distribution is Equitable

The Statement of Net Worth is a sworn statement outlining each person’s assets, liabilities, and income. It’s important to be both accurate, and entirely honest when completing this document. Falsified, or omitted information can be used against you if you and your spouse fail to reach an agreement on the distribution of marital property.

Absent an agreement, the court will decide how assets and liabilities are divided. Omissions or falsifications can result in a less favorable distribution for the person who signed an inaccurate, or incomplete Statement.

While New York is an equitable distribution State, there are still a few which follow community property rules. What this means to you is marital property will be distributed equitably rather than 50/50. Divorce.net offers a list of factors the court will consider when determining what constitutes an equitable distribution in the State of New York. Some of those factors are:

  • Yours and your spouse’s income and property when you married, and on the date you filed for divorce
  • Length of the marriage
  • Yours and your spouse’s age and health
  • Whether the custodial parent needs to live in the family home, and have use or ownership of its effects.
  • Tax consequences to each of you

Separate property is not subject to distribution, but it’s important to know what it is, and how to ensure your Statement of Net Worth reflects both distributable and non-distributable assets, and income.

The experts at HKMP can not only help protect your sole and separate assets, but ensure all marital income and assets are accurately reported before you sign the Statement of Net Worth.

avoid divorce tax consequences

Marital vs Separate Property

In the State of New York, marital property includes anything acquired during the marriage, regardless of who acquired it including:

  • Income earned during the marriage
  • Property purchased with said income
  • Property purchased while married
  • Each person’s retirement benefits earned while married
  • Appreciation of marital property while married

There are a few exceptions which allow property to be considered separate property including:

  • Property acquired before marriage
  • Property either spouse acquired from someone other than each other by gift or inheritance
  • Compensation for personal injuries
  • Property spelled out as personal property in a prenuptial agreement, or other written contract
  • Property acquired from the proceeds or appreciation of separate property insofar as the appreciation didn’t involve a contribution or effort by the other person

Allocation of a business owned prior to the marriage can bring its own set of challenges if it wasn’t addressed in a prenuptial agreement. Though value prior to the marriage is considered separate property, there are certain aspects which can be considered marital property, and subject to equitable distribution.

  • Marital funds transferred to the business
  • Labor contributed to the business by the non-owner spouse
  • Appreciation of the business during the marriage
  • Enhancements such as professional licenses, and education achieved during the marriage

Also, labor contributions by the owner-spouse will be considered when determining how to equitably distribute the business. As such, it’s important to ensure the business is valued accurately at both the beginning and end of the marriage, and that labor contributions by both spouses are valued appropriately.

Appreciation of the business may also be considered allocable. As some spouses may try to hide or deflate assets, especially in a closely held business, hiring a forensic accountant can help ensure all aspects of the marital portion of the business are included, and valued correctly.

Choose Your Tax Filing Status Wisely

Although it’s possible for an uncontested divorce to take as little as six months, it’s more likely yours will take a year or more from start to finish. As such you and your spouse must also agree on tax filing status until the divorce is final, in the event you are still legally married on December 31. You must both sign a document if you wish to submit your returns as Married, filing jointly. Otherwise, you must use the filing status:

  • Married filing separately, or
  • Head of Household

Your tax preparer is your best resource when determining which status will be in your best interests, as well as which spouse, if either, can file as Head of Household. Only when you file for legal separation instead of divorce, and it is approved by the court by December 31, can you file as Single instead of Married, filing separately.

If part of your settlement involves selling the family home, each person is entitled to deduct up to $250,000 for capital gains purposes. Timing of the sale can have a positive or negative impact on the exclusion. An informed decision will protect your share of the sale and help maximize your tax benefits.

HKMP can review your assets, liabilities, and income to help maximize your tax benefits. Thus enabling you to make the best decisions possible under challenging circumstances. Divorce is expensive, financially, and emotionally. The last thing you need to deal with are post-divorce tax consequences.